Finance and Financial Management Commons^™

The Value Of Trading Relations In Turbulent Times, Marco Di Maggio, Amir Kermani, Zhaogang Song

Research Collection Lee Kong Chian School Of Business

This paper investigates how dealers’ trading relations shape their trading behavior in the corporate bond market. Dealers charge lower spreads to dealers with whom they have the strongest ties and more so during periods of market turmoil. Systemically important dealers exploit their connections at the expense of peripheral dealers as well as clients, charging higher markups than to other core dealers. Also, intermediation chains lengthened by 20% following the collapse of a flagship dealer in 2008 and even more for institutions strongly connected to this dealer. Finally, dealers drastically reduced their inventory during the crisis.

Performance Control And Risk Calibration In The Black-Litterman Model, Chyng Wen Tee, Shirley Huang, Kian Guan Lim

Research Collection Lee Kong Chian School of Business

The authors show that risk aversion and prior estimation error input parameters of the Black-Litterman model that are arbitrarily fixed in existing practices should instead be carefully calibrated because they are related to the Sharpe performance ratio and Value at Risk or tail risk of the active portfolio. A related important insight is that these parameters are not entirely exogenous but are connected closely to the portfolio manager's inputs of subjective expected returns, as well as the degree of confidence over these subjective beliefs. The value of τ is closer to zero if the manager believes the initial estimates based …

Corporate Donations And Shareholder Value, Hao Liang, Luc Renneboog

Research Collection Lee Kong Chian School Of Business

Do corporate donations enhance shareholder wealth or reflect agency problems? We address this question for a global sample of firms whereby we distinguish between charitable and political donations, as well as between donations in cash and in kind. We find that charitable donations are positively related to financial performance and firm value, which is consistent with the value-enhancement hypothesis. This positive effect on firm value is stronger for cash than in-kind donations. In contrast, political donations do not appear to enhance shareholder value, but rather tend to reflect agency problems, as they are higher for firms with poor internal corporate …

The Equity-Financing Channel, The Catering Channel, And Corporate Investment: International Evidence, Yuanto Kusnadi, K.C. John Wei

Research Collection School Of Accountancy

We examine how stock market mispricing affectscorporate investment in an international setting. We find that investment ismore sensitive to stock prices for equity-dependent firms than for non-equity-dependentfirms in our international sample. Investment is also more sensitive to stockprices for firms located in countries with more developed capital markets (i.e.,lower costs of raising capital), higher share turnover (i.e., shortershareholder horizons), and higher R&D intensity (i.e., more opaque assets). More importantly, the positive relation between equitydependence and the sensitivity of investment to stock prices is more pronouncedfor firms located in these same countries. These findings are consistent withthe equity-financing hypothesis and the …

Upper Bounds On Return Predictability, Dashan Huang, Guofu Zhou

Research Collection Lee Kong Chian School Of Business

Can the degree of predictability found in data be explained by existing asset pricing models? We provide two theoretical upper bounds on the R² of predictive regressions. Using data on the market portfolio and component portfolios, we find that the empirical R² are significantly greater than the theoretical upper bounds. Our results suggest that the most promising direction for future research should aim to identify new state variables that are highly correlated with stock returns instead of seeking more elaborate stochastic discount factors.

Mutual Fund Trading Costs And Diseconomies Of Scale, Jeffrey Busse, Tarun Chordia, Lei Jiang, Yuehua Tang

Research Collection Lee Kong Chian School Of Business

Larger mutual funds underperform smaller funds even though they have lower percentage transaction costs. Larger funds hold and trade a larger fraction of bigger, more liquid stocks, which leads to lower percentage transaction costs than smaller funds. Smaller funds outperform larger funds primarily when small cap stocks outperform large cap stocks. Overall, we find that it is not trading costs but fund holding characteristics, especially the market capitalization of stock holdings, that drive diseconomies of scale in the mutual fund industry.

Leviathan Inc. And Corporate Environmental Engagement, Po-Hsuan Hsu, Hao Liang, Pedro Matos

Research Collection Lee Kong Chian School Of Business

In a special report in 2010, The Economist called the resurgence of state-owned mega-enterprises, especially those in emerging economies, “Leviathan Inc.”, and warned about the dangers of the state capitalism model. Traditionally, state-owned firms have been criticized for poor governance and questionable efficiency. In fact, they may be better positioned to deal with market failures and externalities. Our findings based on publicly-listed firms in 45 countries suggest that government-controlled companies engage more in environmental issues, and this engagement does not come at a cost to shareholder value. The effect is more pronounced among firms in emerging market economies and in …

Short Selling And Economic Policy Uncertainty, Xiaping Cao, Yuchen Wang, Sili Zhou

Research Collection Lee Kong Chian School Of Business

We study the trading behavior of short sellers in the presence of economic policy uncertainty (EPU). Daily short selling activity at either the aggregate level or the individual stock level is increasing in the EPU index (Baker, Bloom and Davis, 2016). EPU has great explanatory power for short trading. Cross-sectional tests show that the increase in short interest under high political uncertainty is from shorting stocks characterized by higher mispricing, greater policy sensitivity, higher illiquidity, greater volatility or analyst dispersion. Short sellers earn abnormal profits by trading on public information related to EPU.

Does Wage-Inflation Targeting Complement Foreign Exchange Intervention? An Evaluation Of A Multi-Target, Two-Instrument Monetary Policy Framework, Taojun Xie, Jingting Liu, Joseph D. Alba, Wai-Mun Chia

Research Collection Lee Kong Chian School Of Business

We assess the inclusion of wage inflation as an intermediate target of an emerging central bank using a dynamic stochastic general equilibrium model with sticky wages and prices calibrated for the South Korean economy. The model includes wage inflation as an additional target jointly with domestic price inflation and the output gap in a Taylor- type interest rate rule operating with a sterilized foreign exchange (FX) intervention rule. Our results show a complementary relationship between wage inflation targeting and price inflation targeting. That is, by supplementing price inflation targeting with wage inflation targeting, welfare improves for cases with and without …

Ethnic Social Network In Public Housing Market In Singapore, Sumit Agarwal, Hyunsoo Choi, Jia He, Tien Foo Sing

Research Collection Lee Kong Chian School Of Business

This paper investigates the ethnic social network in Singapore's resale public housing market using a unique dataset containing the Cash-Over-Valuation (COV) information for a sample of 73,107 resale public housing transactions from 2007 to 2012. We find that the COV per square meter (psm), which represents a premium above the "objective" housing value, significantly increases with the concentration of buyers' own ethnic group at a housing block level. The results imply that buyers value housing blocks with higher concentration of the same ethnicity group of households. However, the convexity in COV premium suggests that the premium is too large to …

Adapting And Evolving To Grow In The High-Tech Industry, Singapore Management University

Perspectives@SMU

MatchMove started as a gaming platform; it’s now a flourishing enterprise payment solutions company

Corporate Employee-Engagement And Merger Outcomes, Hao Liang, Luc Renneboog, Cara Vansteenkiste

Research Collection Lee Kong Chian School Of Business

Extending the theories of employee incentives and inalienability of human capital, we investigate the link between a firm’s engagement in employee issues and the returns to shareholders around mergers and acquisitions (M&As) and analyze an international sample of 4,565 M&A deals from 48 countries. We find that stronger employee-engagement — especially in terms of monetary benefits — by the acquiring firm is positively related to shareholder returns in domestic deals, but this positive effect is attenuated in cross-border deals, whereas workforce diversity, training and development, or health and safety do not affect shareholder value. The attenuating effect of cross-border deals …

Sensation-Seeking Hedge Funds, Stephen Brown, Yan Lu, Sugata Ray, Melvyn Teo

Research Collection Lee Kong Chian School Of Business

Using a novel dataset of hedge fund manager automobile purchases, we show that, motivated by sensation seeking, hedge fund managers often take risk for personal and non-pecuniary reasons. In line with the sensation seeking view, managers who own powerful sports cars take on more investment risk but do not deliver higher returns, resulting in lower Sharpe ratios. Moreover, funds managed by performance car owners exhibit higher operational risk and are more likely to fail. Performance car owners demonstrate other attributes associated with sensation seeking, such as a preference for lottery-like stocks, unconventional strategies, and active trading.

International Volatility Risk And Chinese Stock Return Predictability, Jian Chen, Fuwei Jiang, Yangshu Liu, Jun Tu

Research Collection Lee Kong Chian School Of Business

This paper investigates the predictive ability of international volatility risks for the daily Chinese stock market returns. We employ the innovations in implied volatility indexes of seven major international markets as our international volatility risk proxies. We find that international volatility risks are negatively associated with contemporaneous Chinese daily overnight stock returns, while positively forecast next-day Chinese daytime stock returns. The US volatility risk (ΔVIX) is particularly powerful in forecasting Chinese stock returns, and plays a dominant role relative to the other six international volatility measures. ΔVIX's forecasting power remains strong after controlling for Chinese domestic volatility and is robust …

The Need For Sustainable Finance, Singapore Management University

Perspectives@SMU

Bringing about sustainable or ‘green’ finance requires a convergence of policy and profitability – and it’s not just the developed countries that are leading the way

Playing Fast And Furious In The Stock Market, Singapore Management University

Research@SMU: Connecting the Dots

Surprising insights into the role of high frequency traders and short sellers revealed by Professor Ekkehart Boehmer’s research.

See the papers:

• Short selling and the price discovery process
• Which shorts are informed?
• The competitive landscape of high-frequency trading firms
• The Good News in Short Interest

Estimating Risks And Resolving Paradoxes, Singapore Management University

Research@SMU: Connecting the Dots

Professor Lim Kian Guan uses sophisticated mathematical tools to extract information out of options data and provide more accurate risk estimates.

See his paper: Portfolio value-at-risk optimization for asymmetrically distributed asset returns

The Macro Behind Microfinance: Cambodia's Financial Inclusion Success Story, Jonathan Chang

Social Space

Financial inclusion refers to the delivery of affordable financial services to disadvantaged and low-income segments of society. However, as it also involves striking a fine balance between managing businesses’ credit risks and improving customers’ access to credit, different countries have made varied progress in their financial inclusion efforts. To date, across both developed and developing nations, SMEs and individuals still struggle in the face of limited access to adequate financing. Yet there is one country that has made considerable strides in this area: judging from the tremendous success of its microfinance sector, Cambodia seems to have found the sweet spot …

Scaling Impact Investing Through Innovative Finance: A Focus On Women's Livelihoods, Durreen Shahnaz

Social Space

I embarked on a journey from the first steps of my career to utilise finance to do good for the world. This journey has now turned into a global movement that is taking the world by a storm, known as impact investing or social finance.

How Hedge Funds Beat The Market, Singapore Management University

Research@SMU: Connecting the Dots

From epic tales spun around investment legends Ray Dalio and George Soros, to the secretive, high-octane world of Wall Street, the hedge fund has attained a worldwide notoriety for being an opaque, unwieldy beast. Professor Melvyn Teo studies what makes them tick.

See the papers:

• The geography of hedge funds
• The liquidity risk of liquid hedge funds; The liquidity risk of liquid hedge funds
• Limited attention, marital events and hedge funds

The Paradoxes Of Risk Management In The Banking Sector, Chu Yeong Lim, Margaret Woods, Christopher Humphrey, Jean Lin Seow

Research Collection School of Accountancy

This paper uses empirical evidence to examine the operational dynamics and paradoxical nature of risk management systems in the banking sector. It demonstrates how a core paradox of market versus regulatory demands and an accompanying variety of performance, learning and belonging paradoxes underlie evident tensions in the interaction between front and back office staff in banks. Organisational responses to such paradoxes are found to range from passive to proactive, reflecting differing organisational, departmental and individual risk culture(s), and performance management systems. Nonetheless, a common feature of regulatory initiatives designed to secure a more structurally independent risk management function is that …

Banking On It: Investment Banks As The Next Step For Impact Investing, Mitchell Laferriere

Social Space

For their size, investment banks have comparatively little to do with the rising practice of impact investing: They make up only nine per cent of all the assets under management (AUM) in the impact investment industry. That totals about US$1 trillion in investments in an US$11 trillion market.

Sofi 101: Understanding Social Finance, Christian Petroske, Florian Parzhuber, Haneol Jeong, John Kinsella, Maaya Murakami, Mitchell Laferriere, Remi Cordelle

Social Space

What is social finance? Rachel Kalbfleisch of the International Development Research Centre (IDRC) defines it as a collection of approaches to managing money that create value for society or the environment, often while producing a financial return,1 while the MaRS Centre for Impact Investing calls it “an approach to managing money to solve societal challenges”.2 In other words, social finance is a movement that covers various ways of using finance—via socially responsible investments, micro-loans, community investments, and so on—to achieve a social or environmental impact. Who is involved in this process? While charities, socially driven businesses and governments all work …

Banking On It: Investment Banks As The Next Step For Impact Investing, Mitchell Laferriere

Social Space

For their size, investment banks have comparatively little to do with the rising practice of impact investing: They make up only nine per cent of all the assets under management (AUM) in the impact investment industry. That totals about US$1 trillion in investments in an US$11 trillion market.

Marital Status And Earnings Management, Gilles Hillary, Sterling Huang, Yanping Xu

Research Collection School Of Accountancy

In this note, we examine the effect of CEO marital status on the riskiness of financial reporting. Using multiple proxies, we find that firms headed by a single CEO display a higher degree of earnings management than those headed by a married CEO. The effect is economically significant. Our results persist in an instrumental variable regression, suggesting that our results are not driven by innate heterogeneity in preferences.

Differences In The Reliability Of Fair Value Hierarchy Measurements: A Cross Country Study, Chu Yeong Lim, Tee Yong Jeffrey Ng, Keng Kevin Ow Yong, Gary Pan

Research Collection School Of Accountancy

Prior research suggests that there are significant differences in how investors perceive the reliability of fair values across the fair value hierarchy. An unaddressed question in this stream of research is whether cross-country differences in institutional factors are able to mediate differences in reliability for the fair value hierarchy measurements. Based on an international sample of banks across 20 different countries, we find that the probability of crash risk is lower among countries with better financial development infrastructure, greater level of trust, tighter security regulations and higher level of disclosure requirements. These results apply to Level 1 assets but not …

Do Disaster Experience And Knowledge Affect Insurance Take-Up Decisions?”, Jing Cai, Changcheng Song

Research Collection Lee Kong Chian School Of Business

This study examines the effect of experience and knowledge on weather insurance adoption. First, we conduct insurance games with farmers, and find that the treatment improves real insurance take-up by 46%. The effect is not driven by changes in risk attitudes and perceived probability of disasters, or by learning of insurance benefits, but is driven by the experience acquired in the game. Second, we find that providing information about the payout probability has a strong positive effect on insurance take-up. Finally, when subjects receive both treatments, the probability information has a greater impact on take-up than does the disaster experience.

Are Shorts Equally Informed? A Global Perspective, Ekkehart Boehmer, Zsuzsa R. Huszar, Yanchu Wang, Xiaoyan Wang

Research Collection Lee Kong Chian School Of Business

Short selling predicts future stock returns globally. We use 11 short-sale measures to examine the informativeness of short sales in 38 countries for the July 2006 to December 2014 period. We find that different short-sale measures display different return predictability. The days-to-cover ratio and loan supply measures have the most robust predictive power in the global capital market. We also document significant cross-country differences in the predictive power of the short selling measures and find that return predictability is stronger in countries with mild forms of short-sale restrictions, better market quality, and more developed markets.

Limited Attention, Marital Events And Hedge Funds, Yan Lu, Sugata Ray, Melvyn Teo

Research Collection Lee Kong Chian School Of Business

We explore the impact of limited attention by analyzing the performance of hedge fund managers who are distracted by marital events. We find that marriages and divorces are associated with significantly lower fund alpha, during the six-month period surrounding and the two-year period after the event. Busy managers who manage multiple funds and who are not part of a team are more affected by marital transitions. Inattentive managers place fewer active bets relative to their style peers, load more on index stocks, exhibit higher R-squareds with respect to systematic factors, and are more prone to the disposition effect.

Gender Effects In Hedge Funds Performance, Karen Yoke Wah Gan

Dissertations and Theses Collection (Open Access)

This paper shows that after controlling for total risks (as funds do not typically hold a completely large diversified portfolio) across different funds, female-managed funds appear to perform better in certain circumstances. For example, female-managed hedge funds perform better during post-crisis times, for investments using the Relative Value Style and also when investments are in the Asia excluding Japan region. However, there are still many conditions in which male-managed funds seem to perform better. Namely, male-managed funds performed significantly positive in the Relative Value, Security Selection, and Multiprocess Styles, notably during the pre-crisis period and also when investments are in …